By Rajat Gandhi
Last month was unusual for the peer-to-peer (P2P) sector in the country. On three different occasions, top representatives from the banking regulator, the Reserve Bank of India (RBI), spoke about the urgent need to regulate the digital financial landscape in the country. Of particular interest were crypto currency, crowdfunding and P2P.
Governor Raghuram Rajan was the first to speak about as he voiced his concerns on crowdfunding. "One of my worries about crowdfunding is that it works while going is good. But when you have to recover (funds), who is going to recover and does it happen, especially in an environment where enforcement is difficult in the first place," said Rajan.
Very soon his deputy S S Mundra talked about the near impossibility to regulate the behaviour and choices of individuals. “Hence, it will be more practical for the regulatory authorities to bring in appropriate regulatory changes in their jurisdictions, which would enable regulation of the aggregators' electronic dealing platforms," Mundra said at the concluding day of the annual bankers’ summit.
The same summit saw another deputy governor of RBI, R Gandhi, dwell on the topic for an extended tenure. “While so far we have discussed certain disruptive innovations which we support, we also need to discuss certain other innovative developments which have the potential to be disruptive of course, but not of so desirable, or of questionable, relevance, or at least we need to be carefully monitoring and be vigilant,” says Gandhi. He goes on to add that two developments – digital money or crypto currency and crowd funding, are instruments that worry him.
The question arises as to why the sudden flurry of activity within RBI and are apprehensions misplaced. One reason is that crypto currency, crowdfunding and P2P has started reaching a scale where the stakes are getting higher. The RBI probably feels it is time it starts taking digital finance significantly.
Firstly we need to understand all three are different entities and cannot be clubbed together. First is a currency, crowdfunding is risk capital against equity or future revenues and P2P lending is crowdfunding of debt.
Discomfort:
During my weekly columns here, a particular comment caught my eye. For an article I had penned on P2P and its benefits, a reader’s comment read, “This is like a tobacco company talking about the benefits of smoking.”The comment stuck with me for a long time. P2P as a platform is not harmful or illegal across the world and in India by any stretch of imagination. It helps in reducing costs as it works on principle of reverse auction. We have witnessed smart borrowers brining down interest rates.
Despite the apparent benefits, there is an air of suspicion about the system. It is largely due to the fact that there is no regulatory legitimacy framework for of the P2P system due to policy inaction. Of the three P2P is clearly one of the most exciting alternative finance medium, but regulatory issues remain and the sector continues to be in the gray.
Gandhi’s worry is justified since crypto currency was designed to bypass the authority of Central Banks around the world. Crowdfunding on the other hand looks to connect people willing to invest in a project or venture through the Internet. While crowdfunding was not designed to bypass regulatory provisions, by the virtue of being outside the traditional financial system, it has the potential to be problematic.
What has troubled the regulator is that the checks and balances are not in place. Unlike the West, where many of these innovations started, India is yet to come up with any framework to regulate crypto currency, crowdfunding and P2P lending.
Huge benefits:
Rajan and his deputies agree that such innovations can play a great role in financial inclusion and Gandhi goes on to say that both Crowdfunding and crypto currency can assist and bring about inclusive growth. “Crowdfunding can help fund needy person or entity, in searching and locating those who have the particular aptitude and willingness to help that person or entity, as only such people / entities respond to the crowdfunding call. This way both can support financial inclusion,” he says.
Last year the market regulator SEBI had come up with a draft paper to regulate crowdfunding in India. SEBIs main and rightful aim was to enable SMEs tap new sources of finance and at the same time ensure investor protection. However, there has been little movement on the draft guidelines since then and the draft remains only on paper.
The collective power of people has been able to make a real change. In our very short span of existence, as a P2P platform, we have had over Rs 1.25 crore of money lent through the platform. We have had 12,500 borrowers and 2,500 lenders registered on the platform, committing over Rs 2.6 crores. At a run rate of over Rs 40 lakh per month, we have not witnessed a single case of bad debt on our platform.
This shows that with almost negligible marketing and publicity, P2P as a system works. It is built on a robust technological platform with checks and balances that far outweigh the profiling a normal bank carries out before extending a loan.
RBI as a regulator of the banking sector in the country should move fast to streamline provide regulatory leadership to the sector. Genuine startups like ours and people have a lot to lose if unscrupulous operators looking to make a quick buck ruin the sector.
By 2016, the Indian loan market is expected to reach a size of Rs 21,980.6 billion, with a CAGR of 18.7 per cent and we want to disburse Rs. 800-1000 crore in the next three to four years. We want to be faster than Uber. The internal target is that a borrower should get a loan before an Uber arrives at his doorstep. But, for that to happen, both RBI and SEBI need to come up with a set of policies. This will lead
to greater confidence and faith and at the same time enable players in the P2P domain to iron out their lending policies.
(The writer is Founder, CEO of peer to peer lending marketplace, Faircent.com)
